How to make a successful exit

July 2, 2018


People exit from their businesses for a variety of reasons. Some people want to retire. Some with knowhow are offered a good price by a big corporation that wants to stay big.

Some want to sell non-core activities. Some are affected by recession, others by technological progress. In the tech industry, start-up founders hope to cash in after 3-4 years if they don’t crash out.

How does a company exit (via an M&A deal) at a good price? A corporate auction may sometimes double the starting price, but how does a seller company get to the best starting price in the first place? And what are potential buyers likely to look for in a typical business?

An exit strategy is needed. In this article we briefly discuss some factors for sellers and their advisors to check out ahead of any M&A/exit deal.

Prepare for the deal

There are a number of stages in any deal including the following. Prepare your objectives, reasons, information, advisors and the business itself. Identify candidates. Auction, woo and negotiate. Check the seller has finance in place. Execute the deal. Post deal integration.

What types of deal do you want?

There are many ways to cut the deal. Do you want a share sale?  An asset purchase?  A management buyout by existing management? A management buy-in by a new hungry but experienced team? Or a just an exclusive license or supply contract. Much will depend on tax, who is the stronger party and the overall circumstances – see below.

What are the seller’s reasons for selling?

The seller must have a plausible answer to this question. Opportunity to make a capital gain I(see above)? Forced to sell -bankruptcy, death or sickness? Retiring? Increased regulation? Increased competition or failing business? If the latter – is there a turnaround opportunity or an asset opportunity for the buyer?

What are the buyer’s reasons for buying?

Often, the buyer typically wants access to a new product or new technology. But not always. Other reasons for buying include access to new customers or sector, economies of scale, market dominance, turnaround opportunity, asset opportunity. But the buyer must do due diligence and be careful not to overspend.

What are the main methods of sale?

Methods of sale include a trade sale, financial sale, auction, IPO, exclusive license or supply, buy-out, buy-in.

Questions to ask before selling a business

Is this the right time? Is the business in good shape? Can profitability be reasonably enhanced? Careless cost-cutting may be spotted in due diligence. So may window dressing the financial statements – typical techniques not recommended include inflating inventory, “losing” supplier invoices, premature income recognition. Are personnel performing well? Are management performing well? Is the customer relations management system doing its job? Do you know the realistic value range of the business? Who will help sell the business? What will the key negotiation issues be- price and what else? Will you accept sale installments, typically linked to sales or performance milestones? Are you prepared to stay on to help ensure a smooth handover?

Have your business plan ready.

As Paul Simon sang, “Get a New Plan, Stan!” (50 Ways to Leave Your Lover).

Every business should have a business plan. Set goals. Have a strategy and time-table for achieving the goals. Share relevant parts with employees. For this, management needs to demonstrate leadership. Leadership means a longer term vision and entrepreneurial skills to make it all happen roughly to plan (mishaps happen along the way). Check intellectual property is patented or otherwise protected. Assess the market and your strategy for reaching the market. Identify unique selling points, points of competitive advantage e.g. niche product, trend or clientele. Check what the competition offers. List your competitors and why you think you are better.  Improve your marketing e.g. branding, remove boring language, find someone or an organization to endorse your product or service. Make customers feel special – problem solving, educational material, first look at something new.  Have past financials ready and a budget going 3 – 5 years into the future, reflecting your milestones (see above about vision). Predicting the future is difficult, but necessary to help identify relevant factors. What matters in particular are the assumptions made – they need to be listed and make sense.  Review costs. Review cash flow needs and resources. Consider short term improvements e.g.  renovate premises, renovate the website, finalize customer orders, get customers to pay, pay suppliers and other debts?

What about the tax side?

Sellers usually prefer a share sale. That way shareholders may pay just capital gains tax, 8, but they should check the situation in each country concerned. Employees in a share purchase or share option plan may in some cases  just capital gains tax too. But the buyers typically prefer to buy the main assets of a company – which can result in tax both for the company and its shareholders.
Often buyers pay in installments. Sometimes buyers, especially those listed on a stock exchange,  pay partly or entirely with their own stock (shares), not cash. There may even be a lock-up period after the deal to prevent large-scale sales into the market  at one point in time and to let the buyer check what it bought. The timing of the resulting tax liability for each party must be checked. Are any stamp duties triggered (especially in the real estate sector)? What about VAT or sales tax?   What about withholding tax? Detailed inquiry and advance planning is absolutely essential for both sides.
The transaction agreement will of course need to reflect all these tax aspects among many others. As always, consult experienced legal and tax advisors in each country at an early stage in specific cases.

If you have an exit candidate, contact us for help in finding potential buyers. And see M&A Propositions in the INAA Website.

Leon Harris - Harris Consulting & Tax Ltd
[email protected]
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax Ltd